It used to be that the government and our employers could be counted on to provide for our retirement. No longer. That's why there's never been a more important time to learn the basics of personal finance.
Resistance is futile
Defined-benefit plans are going the way of the dodo, and so, too, could Social Security.
Indeed, as Robert Pozen wrote in The Wall Street Journal about the recently passed Pension Protection Act, "[It] will effectively put the nail in the coffin of defined-benefit plans for corporate America. ... No public company in the U.S. will create a new defined-benefit plan, and the existing ones will be gradually phased out, frozen, or converted into cash balance plans."
Trust no one
Then there are the employers that go bankrupt. When this happens, pension liabilities are transferred to the Pension Benefit Guaranty Corp. (PBGC), an arm of the federal government. But there are some shortfalls to this model. First, the PBGC caps payouts at approximately $45,000 a year. Second, there are no health-care benefits.
What's worse, the PBGC already has a $313 billion funding shortfall.
And it's not alone. Many companies have underfunded pension plans. According to the Milliman 2006 Pension Study, while the funded status of the pension plans of the 100 largest U.S. corporations improved in 2005, these plans still face a $96 billion deficit. Plans currently falling short include those offered by Chevron
If that isn't scary enough, a court just allowed Delta to terminate its plan for pilots. And companies such as Citigroup
The 401(k) solution
Pension obligations have the potential to destroy businesses when times get tough. That's why you see newer companies such as Southwest and JetBlue creating defined-contribution plans such as 401(k)s for employees, and why Pozen asserts that no new defined-benefit plans will ever be created.
In these plans, the only guarantee is the amount of money that goes in -- not the amount of benefits paid out. This eases the burden on employers, but it increases the burden on employees to make sure their savings are put to good use.
Soon, all Americans will be managing their own IRAs, 401(k)s, and maybe even health savings accounts (HSAs). When that happens, it will be up to you (yes, you!) to know some finance.
Ask yourself: Is there anyone you would rather trust your retirement to than you? As comforting as it is to think that there is an omniscient and beneficent god of retirement out there, neither the government nor your employer is capable of being that deity.
Neither cares about you or your future in anything more than an abstract way. Neither knows the details of your life, health needs, or retirement timeline. That's why managing your own future can make your future better.
When you're in charge of your own money, you pick where and how you want to invest. Risk-averse? Short timeline? Consider a bond fund such as Managers Fremont or a low-cost index such as Vanguard Total Stock Market. If you have a longer timeline, you can learn to pick individual equities and amass a nice nest egg as you try to beat the market year after year after year.
The Foolish final word
Scared? Don't be. Help is all around you. For starters, The Motley Fool offers all kinds of resources to help you better manage your money. From choosing the best mutual funds for your money to allocating your resources in the most efficient way to providing helpful tips to save on taxes and reduce paperwork, Rule Your Retirement is your one-stop shop for planning your future. Click here to let retirement guru Robert Brokamp help get your retirement on track -- or supercharge it if you've already started saving. There is no obligation to subscribe.
The decline of passive retirement planning is not so much a problem as an opportunity. You can make your future as bright as you want it to be.
This article was originally published Jan. 20, 2006. It has been updated.
Tim Hanson owns shares of VTI, the Vanguard Total Stock Market exchange-traded fund. JetBlue is a Motley Fool Stock Advisor recommendation. Managers Fremont is a Champion Funds recommendation. No Fool is too cool fordisclosure.